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Legislation that would establish a federal Office of Insurance Information has won the qualified support of state insurance regulators, but remains a concern for state lawmakers.

At a June 10 hearing of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Illinois Director of Insurance Michael McRaith said the legislation, which was introduced by subcommittee chairman Paul Kanjorksi, D-Pa., has won the “conditional support” of the National Association of Insurance Commissioners, provided that the powers granted to the proposed OII under the bill are not expanded during the legislative process.

The legislation, known as the Insurance Information Act, or HR 5840, would establish an Office of Insurance Information within the Treasury Department to provide needed expertise to the federal government on insurance issues and to work with the U.S. Trade Representative in dealing with other countries.

McRaith said the NAIC would like to see some parts of the legislation clarified, specifically with regard to the definitions of certain terms and the language of a provision that would allow the Treasury Secretary to stay the pre-emption of state laws that may run afoul of U.S. trade policy.

“Our conditional support,” McRaith added, “also hinges on the proposal not changing in ways detrimental to insurance consumers as it winds its way through the legislative process.”

The legislation, as currently drafted, includes a provision establishing an “advisory group” within the proposed OII and specifically provides that the NAIC would play a primary role in that group. This provision drew the ire of Rhode Island state representative Brian Kennedy, who testified on behalf of the National Conference of Insurance Legislators.

“While acknowledging that that the NAIC is a repository for insurance information, NCOIL believes that giving such a primary role to the NAIC in the OII Advisory Group allows the tail to wag the dog,” he told the committee, adding that “four-fifths” of state insurance commissioners are gubernatorial appointees.

Kennedy also quoted the words of past NAIC President and Alabama Commissioner Walter Bell in saying that the NAIC is not a governmental body and has no regulatory authority. Should the bill be enacted as drafted, Kennedy said, “This would be a dramatic enhancement of the authority for this non-governmental entity known as the NAIC, which comes at the expense of the state officials to whom they are accountable.”

McRaith noted that the legislation provides for a number of as-yet unfilled positions in the advisory group, and that NCOIL could fill at least some of those seats at the table. When asked by Kanjorski if establishing a role specifically for NCOIL within the group would assuage their concerns, Kennedy said that doing so “would probably help us a little bit” towards supporting the concept of a federal OII.

Stronger criticism of the legislation came from one of the committee members, Donald Manzullo, R-Ill., who said he was “astonished” by McRaith’s testimony and warned that the legislation would only serve to move the industry closer to a federalized regulatory system. “That’s how this place works,” he said, explaining that a proposal such as the OII legislation was the “soft punch” to be followed later by a much stronger action.

“This is an attempt to federalize the insurance industry,” Manzullo said. “That’s all it is.”

McRaith said his comments were a “good faith” response to a request by Kanjorski to measure the substance of the legislation, and that he was commenting on this specific legislation and not something that might be put forth in the future.

Another of McRaith’s fellow Illinoisans, Rep. Melissa Bean, also had the future in mind, but in a more positive sense. As a supporter of the OII legislation, and of legislation establishing an OFC, Bean noted that while she and McRaith might differ on the need for a federal insurance regulator, his record and expertise on insurance issues, “would make him an ideal candidate for the role” of a federal insurance regulator.

While those representing the states were divided on their support for the proposal, the federal executive branch was strongly supportive of the bill. Deputy Assistant Secretary Jeremiah Norton told the panel that the creation of an OII under the bill was very similar to a recommendation made in the Treasury’s recent “blueprint” for reforming the financial services regulatory system. What concerns the Treasury had, he added, were largely matters of clarification and were in his view “very bridgeable.”

Aside from the role played by the NAIC, another major concern for those testifying before the committee was the authority the OII would have to pre-empt state laws that run counter to international agreements. Both McRaith and Kennedy expressed their concerns on the issue that federal pre-emption be should be limited and kept as narrowly defined as possible.

For those within the industry itself, the discussion was somewhat more conflicted. A main concern expressed by property-casualty as well as life insurers, was that the pre-emptions, which are designed to ensure that foreign firms are not subject to discriminatory treatment, do not inadvertently end up receiving better treatment than domestic companies.

“We believe pre-emption is appropriate in the context of this bill, but we also believe the pre-emption language must be carefully crafted in order to avoid consequences that neither the industry nor Congress intend,” said Stephen Rahn, vice president and associate general counsel for the Lincoln Financial Group, who testified on behalf of the American Council of Life Insurers.

Neal Wolin, president and chief operating officer of property and casualty operations for the Hartford Group, expressed a similar concern on behalf of the American Insurance Association. In refining the bill from its original version, Wolin noted that the pre-emption was narrowed to block only those measures that would cause a jurisdiction to treat a non-U.S. insurer “less favorably” than a domestic company. “Pre-emption should be exercised to ensure that all insurers are subject to the same standards and compete on an equal basis,” he said.

On a practical level, Property Casualty Insurers Association of America President and CEO David Sampson said the process of how a pre-emption would be established was a concern for his group. “This bill would, for the first time, give this potential federal entity pre-emptive authority over state insurance laws as an administrative process rather than as a legislative one,” he said. “This creates uncertainty in an industry that relies on relative statistical certainty for its very existence.”

By using the legislative process, Sampson said, pre-emptions would be better defined and better understood. “The legislative process is the most appropriate way of answering questions such as what happens to existing structures like the McCarran-Ferguson Act,” he said.

Additionally, Sampson noted, given that pre-emptions are tied into treaties, the fact that the U.S. does not have treaties in force with every country could lead to state laws being pre-empted in some cases but not others. “Thus, pre-emption may not apply equally in all states or to all policyholders.”

Pre-emption, as outlined in the bill, did receive the strong support of the Reinsurance Association of America, with Tracey Laws, RAA senior vice president and general counsel, calling the provision “critical” to ensuring that U.S. policy on international issues is applied uniformly throughout the country.

“To do otherwise would perpetuate the current patchwork system of regulations and undermine the ability of the U.S. to effectively participate in the international arena,” she said, “including in the ability to reach international agreements on insurance policy issues.”

Given the shortened congressional calendar due to the federal elections set for November, the legislation has a small window of time to move through the House and Senate, where no companion bill has been introduced. Kanjorski noted during the hearing the “terrible time constraints” facing the bill, and expressed a desire to move it through the committee “in the near future.”

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